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Joseph Stiglitz_ the Financial Crisis is the Fruit of Dishonesty

Joseph Stiglitz_ the Financial Crisis is the Fruit of Dishonesty

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Published by Bert M Drona
Dishonesty in the finance sector dragged us here, and Washington looks ill-equipped to guide us out
Dishonesty in the finance sector dragged us here, and Washington looks ill-equipped to guide us out

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Categories:Types, Research, History
Published by: Bert M Drona on Nov 18, 2009
Copyright:Attribution Non-commercial

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10/07/2010

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The fruit of hypocrisy 
Dishonesty in the finance sector dragged us here, and Washingtonlooks ill-equipped to guide us out
Joseph Stiglitz: The financial crisis is the fruit of dishonesty on the part of ...http://www.guardian.co.uk/commentisfree/2008/sep/16/economics.wallstr...1 of 34/25/2009 12:50 PM
 
Joseph Stiglitz
The Guardian, Tuesday 16 September 2008
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Houses of cards, chickens coming home to roost - pick your cliche. The new low in thefinancial crisis, which has prompted comparisons with the 1929 Wall Street crash, is thefruit of a pattern of dishonesty on the part of financial institutions, and incompetenceon the part of policymakers. We had become accustomed to the hypocrisy. The banks reject any suggestion they should face regulation, rebuff any move towards anti-trust measures - yet when troublestrikes, all of a sudden they demand state intervention: they must be bailed out; they are too big, too important to be allowed to fail.Eventually, however, we were always going to learn how big the safety net was. And asign of the limits of the US Federal Reserve and treasury's willingness to rescue comes with the collapse of the investment bank Lehman Brothers, one of the most famous WallStreet names.The big question always centres on systemic risk: to what extent does the collapse of aninstitution imperil the financial system as a whole? Wall Street has always been quick tooverstate systemic risk - take, for example, the 1994 Mexican financial crisis - but loth toallow examination of their own dealings. Last week the US treasury secretary, Henry Paulson, judged there was sufficient systemic risk to warrant a government rescue of mortgage giants Fannie Mae and Freddie Mac; but there was not sufficient systemic risk seen in Lehman.The present financial crisis springs from a catastrophic collapse in confidence. The banks were laying huge bets with each other over loans and assets. Complextransactions were designed to move risk and disguise the sliding value of assets. In thisgame there are winners and losers. And it's not a zero-sum game, it's a negative-sumgame: as people wake up to the smoke and mirrors in the financial system, as peoplegrow averse to risk, losses occur; the market as a whole plummets and everyone loses.Financial markets hinge on trust, and that trust has eroded. Lehman's collapse marks atthe very least a powerful symbol of a new low in confidence, and the reverberations willcontinue.The crisis in trust extends beyond banks. In the global context, there is dwindlingconfidence in US policymakers. At July's G8 meeting in Hokkaido the US deliveredassurances that things were turning around at last. The weeks since have done nothing but confirm any global mistrust of government experts.How seriously, then, should we take comparisons with the crash of 1929? Mosteconomists believe we have the monetary and fiscal instruments and understanding toavoid collapse on that scale. And yet the IMF and the US treasury, together with central
Joseph Stiglitz: The financial crisis is the fruit of dishonesty on the part of ...http://www.guardian.co.uk/commentisfree/2008/sep/16/economics.wallstr...2 of 34/25/2009 12:50 PM

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